Economics Unit 1

• Microeconomics


  Involves looking at the operation of the smaller parts that make up the wider Australian economy. It therefore focuses on a single firm, industry, sector or a particular market
• Macroeconomics


  Looks at the broader picture combining all markets and industries and the overall state of the country's economy. It therefore concentrates on areas like national spending, output, income, employment, the inflation rate and overall material living standards
• Positive economics


  Fact-based economic statements that can be verified or tested to be either true or false, using evidence
• Normative economics


  Statements or claims that are based on opinion or value judgements and cannot be verified or tested to be either true or false
• Resources (factors of production)

  • Natural
  • Labour
  • Capital
• Relative scarcity


  The basic economic problem that arises because people's unlimited wants exceed the limited resources available from which to produce goods and services
• Needs


  The basic goods and services that are necessary for our survival, such as food, clothing and shelter
• Wants


  Something we desire to have to improve our satisfaction or quality of life, but that is not necessary for our survival
• Opportunity cost


  The value (or net benefit) that could have been derived if the next best alternative/option was chosen
• Rational economic decision making

  • Choosing the alternative with the highest anticipated net benefits/rewards or lowest net costs
• Opportunity cost


  The benefit that is given up when one choice is made instead of an alternative
• Movement along the PPF

  Allocating more to the production of one good and less to another
• Points inside the PPF


  Indicate the economy is not efficiently using its resources
• Points outside the PPF


  Are not achievable today, but are achievable in the future through an increase in the quantity or quality or resources
• Productive (technical) efficiency


  A situation where a nation's resources are producing the maximum amount possible (and at the lowest cost)
• Allocative efficiency


  Resources need to be allocated or used in the economy in combinations that provide the maximum possible benefits for consumers and the nation
• Trade-offs


  To gain something of value with our time or money, we necessarily forego the opportunity to do a range of other things with that time or money
• Cost-benefit analysis


  A comparison of the expected costs and the expected benefits of a particular course of action or project
• Three basic economic questions

  • What to produce
  • How to produce
  • For whom to produce
• Different economic systems


  • Market capitalism
  • Planned socialism
  • Planned capitalism
  • Mixed economy
• Material living standards


  Measures people's access to goods and services
• Non-material living standards


  Factors that affect a person's quality of life irrespective of income
• Economic agents


  • Private sector agents (Businesses, Household consumption)
  • Public sector agents (All three levels of Government, Government owned resources, ACCC, RBA, GBE)
• Rational consumer behaviour


  Consumers act in their self-interest to maximise their utility or satisfaction given their budget (or income) constraint
• Law of diminishing marginal utility

  Each additional (or marginal) unit of a good or service that is consumed generates less utility (satisfaction) than the previous one
• Positive and negative incentives

  • Positive incentives (Positive externality, Subsidies, Regulations)
  • Negative incentives (Direct taxes, Negative externality, Regulations)
• Government intervention is done to stabilise the economy, increase efficiency, and redistribute income
• Budgetary policy


  Addresses taxation and government spending, and it is generally determined by government legislation
• Monetary policy


  Addresses interest rates and the supply of money in circulation, and it is generally managed by a central bank
• Gross Domestic Product (GDP) measures the value of all final goods and services produced within a country's borders during a specific period of time.
• Market


  A place or situation where buyers and sellers of goods and services come together to exchange, namely, to exchange goods and services
• 4 types of market structure

  • Perfect Competition
  • Monopolistic Competition
  • Oligopoly
  • Pure Monopoly
• Perfect Competition


  • Many Buyers and Sellers
  • Firms are price takers
  • Strong competition
  • Branding not present
  • Homogenous products
  • Easy to enter and exit market
• Monopolistic Competition


  • Moderate number of sellers
  • Strong competition
  • Branding/ product differentiation is important
  • Somewhat easy to enter/exit market
  • Firms have knowledge of the market
• Oligopoly


  • Leading sellers
  • Firms are price makers
  • Brand and product differentiation is very important
  • Difficult to enter or exit market
  • Firms are very competitive with each other
• Pure Monopoly


  • One seller controls the output of the industry
  • No close substitute available
  • No competition
  • No product differentiation
  • Extremely difficulty to enter and exit market
  • Firm is a price maker
• Assumptions of perfectly competitive market

  • Strong competition and absence of market power
  • Low barriers to entry
  • Homogenous products
  • Consumers have more say (sovereignty)
  • Minimal government restrictions
  • Both buyers and sellers have perfect knowledge
  • Goal is to maximise profit
• Effects of market power

  • Competition
  • Low prices
  • Better allocation of resources
  • Better quality of goods and services
  • More choice
  • More internationally competitive
  • Better living standards

  
• Mixed economy


  Australia has a mixed economy where the three basic economic questions (what, how and for whom to produce) are generally answered by reference to the market or price system, and also involves some government intervention to correct instances of market failure and other weaknesses of a pure market system
• Law of Demand


  As the price increases, there is a contraction in the quantity demanded, causing a movement upwards along the demand line. As the price decreases, there is an expansion in the quantity demanded, causing a movement downwards along the demand line.